English Law Sale and Purchase Agreements

Question 1

Warranties - definition

Answer 1

statement of fact by the warrantor (i.e., not a promise or an obligation to do something) that the warrantor claims is true and for which the warrantor agrees to pay damages if it is not true.

“There are no environmental liabilities relating to the property.”

Question 2

Warranties - purpose

Answer 2

Warranties are like answers to questions designed to obtain information about the target.

Question 3

Warranties - breach

Answer 3

 If a warranty is breached (untrue), the aggrieved party can claim contractual damages to the extent that it can prove loss resulting from the breach
– no right to terminate the SPA
 Damages are such as to restore the aggrieved party to the position that it would have enjoyed if the warranty had been true.
 Remoteness of loss applies, and failure to mitigate is prejudicial.

Question 4

Representation - fact

Answer 4

 A representation is a statement of fact or law made by (or on behalf of) the seller to the buyer which induces the buyer to enter into a contract.
 Same concept as a warranty, but there are key differences between a breach of warranty and a breach of representation.

Question 5

Misrepresentation - definition

Answer 5

– untrue statement by the seller that induces the buyer to enter into a contract causing the buyer loss;
– fraudulent (knowingly without truth), negligent (carelessly or without reasonable grounds for believing it is true) or innocent (without fault);
– termination and/or damages (only damages if innocent), but failure to mitigate
is prejudicial.

Question 6

Misrepresentation - proof

Answer 6

– Misrepresentation may be proven by showing a false statement of fact to the buyer that was material (i.e., would have induced a reasonable party to contract) and that was relied on by the buyer in entering into the contract.
– The buyer may rescind the contract and/or claim damages in tort for any resulting loss such as to restore it to the position that it would have enjoyed had the misrepresentation never been made.

Question 7

Warranties / Representations - practical implications

Answer 7

– seller should warrant only;

– buyer wants the seller to give representations and warranties.

Question 8

Warranties / Representations - Drafting point for the benefit of the seller

Answer 8

“The Buyer’s sole remedy for a breach by Seller of a representation and/or warranty hereunder will be limited to damages to be assessed in accordance with this Agreement.”

Question 9

Signing - closing - seller conduct

Answer 9

seller’s obligation to run the business in the ordinary course, and obtain the buyer’s consent for certain material actions, between signing and closing.

Question 10

Disclosure letter - seller

Answer 10

Seller will disclose against warranties (and representations) via a
Disclosure Letter and should request the right to update the Disclosure
Letter for events occurring between signing and closing.

Question 11

Indemnities - definition

Answer 11

An indemnity is a promise by the seller to reimburse the buyer in respect of a particular type of liability should it arise.

The purpose of an indemnity is to provide a guarantee remedy on a
dollar-for-dollar basis for the buyer in circumstances where a warranty is inapplicable.

Question 12

Indemnities - drafting

Answer 12

– “The Seller will indemnify the Buyer for any and all environmental liabilities relating to the property.”
– “The Seller shall be liable for and pay, indemnify and hold harmless the Buyer and its direct and indirect subsidiaries (including the Target) from and against any Tax Liability of the [Target] for any Pre-completion Tax Periods.”

Question 13

Indemnified warranties - Buyer friendly

Answer 13

If representing the Seller, beware of “indemnified warranties” which
provide the best of both:
– “…in the event of a breach of Warranty by the Seller, the Seller shall pay the Buyer on demand an amount equal to the greater of:
 the reduction in value of the relevant asset or, as the case may be, the amount of the relevant liability; and
 the reduction in the value of the Shares.“

Question 14

Indemnified warranties - Seller friendly

Answer 14

The Seller should seek to delete this provision, or otherwise modify it in a way that tracks the common law:
– “… The Seller shall be liable to the Buyer for the reduction in the value of the [Shares] [as well as all documented third party out-of-pocket costs and expenses (excluding for the avoidance of doubt management time) reasonably incurred by the Buyer and the Target in relation to remedying any Warranty breach of the Seller].”

Question 15

Indemnified warranties - Seller friendly - mitigation

Answer 15

seller should at a minimum require that the SPA impose on the buyer an overarching duty to mitigate all losses.

Question 16

Representation v Warranty v Indemnity

Answer 16

Warranty:
– statement of fact relating to the past or present
– that warrantor says is true and
– agrees to pay damages if it is not true;
– remoteness of loss applies and failure to mitigate is prejudicial.
 Representation:
– essentially the same as a warranty but
– grants additional right of termination to aggrieved party and
– different damages calculation (tort);
– failure to mitigate is prejudicial.
Indemnity:
– forward-looking;
– agreement to bear the costs of a known risk materialising ($ for $);
– duty to mitigate and remoteness of loss do not apply if indemnity is structured as a debt claim.

Question 17

Disclosures

Answer 17

Disclosure via Disclosure Letter or Disclosure Schedules
 Discloses exceptions to the seller’s warranties (and representations)
– existing liabilities
– existing breaches
 Generally, no liability for breach of a warranty (representation) if such breach is “fairly” disclosed.

Question 18

Disclosures - standards for disclosure

Answer 18

 A fair disclosure must contain sufficient detail to identify the nature and scope of the matter being disclosed
– “fairly disclosed with sufficient detail to identify the nature and scope of the matter disclosed in the Disclosure Letter”
 Fair disclosure standard can be modified by agreement
– “fairly, fully, specifically, clearly and accurately disclosed, with sufficient detail to identify the nature and scope of the matter disclosed, in the Disclosure Letter”

Question 19

Disclosures - general v specific

Answer 19

 General Disclosures:
– Matters of which the buyer arguably ought to be aware:
 Disclose public records and all publicly available information;
 disclose the data room;
 disclose all information, including emails, provided by the seller to the buyer or its advisers.
 Specific Disclosures:
– disclosures against specific warranties.
 Buyer should always insist that disclosures, whether general or specific, contain sufficient detail to identify

Question 20

Disclosure provisions

Answer 20

“Disclosed” or “Disclosure” means any matter, event or circumstance that is fairly [, fully, specifically, clearly and accurately] disclosed (with sufficient details to identify the nature and scope of the matter disclosed) in the Disclosure Letter [or any of the Disclosure Documents].

“The Seller’s Warranties are deemed for all purposes to be qualified by the Disclosures, and the Seller shall have no liability under this Agreement for any breach of Warranty to the extent that the matter giving rise to such breach is Disclosed in the Disclosure Letter.”

Question 21

Disclosure - Seller friendly standard

Answer 21

The Seller should insist on a ordinary course “fair disclosure” standard only without additions such as “specifically, fully, clearly and accurately”.

Question 22

Disclosure - Seller friendly - general application

Answer 22

“Whilst we have attempted in this disclosure letter, for ease of reference, to make disclosure by specific reference to particular Warranties, each general and specific disclosure in this disclosure letter is to be treated as a disclosure against each and every Warranty to which it may reasonably be regarded as being relevant.”

Question 23

Disclosure - seller friendly - full particulars

Answer 23

“Where brief particulars only of a matter are set out or referred to in this disclosure letter, or a document is referred to but not attached, or a reference is made to a particular part only of such a document, full particulars of the matter and the full contents of the document are deemed to be disclosed and it is assumed that the Buyer does not require any further particulars.”

Question 24

Disclosure - Buyer friendly

Answer 24

 Buyer should require that disclosures be limited to specific issues
described in Disclosure Letter.
 Buyer should require that disclosures be specific and cross-referenced against certain warranties as described in Disclosure Letter.
 Buyer should require that all disclosed documents be expressly identified and provided.

Question 25

Liability Limitations for the Seller - financial, time

Answer 25

 The Seller’s liability for the warranties, representations and indemnities is usually limited in the SPA:
– financial limits:
 maximum cap on monetary liability
 small claims threshold
 bundling of claims threshold
– time limits:
 statute of limitations or unlimited for title, capacity and authority
 1-3 years for non-tax
 statute of limitations for tax
 Fraud (dishonesty, wilful concealment) can be an exception.

Question 26

Liability Limitations for the Seller - general

Answer 26

In addition to seller’s disclosures against the warranties/representations and SPA financial and time limits, the seller’s liability is often limited in the SPA by making the warranty and representation (and sometimes indemnity) remedies subject to:
– seller’s knowledge qualifiers and materiality qualifiers;
– seller’s right to handle disputes (conduct of claims) / cure period;
– buyer’s duty to promptly provide notice of any potential claim;
– no double recovery (e.g. insurance or third party payments);
– liability being provided for in the accounts (if accounts have been disclosed to buyer);
– buyer’s acts after completion or retrospective changes in law;
– buyer’s duty to mitigate loss;
– buyer’s knowledge.

Question 27

Tactics - Seller

Answer 27

 Try to warrant only, or ensure that SPA provides that a breach of warranty or representation will only trigger a damages claim.
 Limit losses by time and monetary caps and other limitations such as an express duty on buyer to mitigate.
 Disclose as much as possible against warranties / representations:
– disclosures may lead to reduction in purchase price or indemnities being sought.
 Indemnity obligations should be expressly tailored and negotiated.

Question 28

Tactics - Buyer

Answer 28

 Conduct fulsome due diligence.
 Obtain a complete set of warranties, to be given at signing and repeated at closing.
 Require completion accounts and obligations on seller’s conduct between signing and closing.
 Understand and negotiate disclosures, and attempt to allow only specific disclosures that fairly disclose liabilities.
 Seek indemnities, or reduction in purchase price, for certain identified risks.
 Parent company guarantee
 Holdback or Escrow Amount
 Right to set off claims against deferred consideration

Question 29

Deeds

Answer 29

English law SPAs are sometimes executed as “deeds”. These are special legal instruments which do not require consideration and have a 12 year limitation period under English law (as opposed to 6 years for ordinary contracts).

Question 30

Disclosure - Edward Prentice v Scottish Power [1997] 2 BCLC 264

Answer 30

effective, a disclosure must be “fair”―in the sense that a seller is normally required to disclose “facts and circumstances sufficient in detail to identify the nature and scope of the matter disclosed and to enable the purchaser to form a view whether to exercise any of the rights conferred on him by the contract.” (Edward Prentice v Scottish Power [1997] 2 BCLC 264.) Merely making known the means of knowledge or reference to a source of information that may enable the buyer to work out certain facts and conclusions may not itself be sufficient.

Question 31

Disclosure - Edward Prentice v Scottish Power [1997] 2 BCLC 264 -seller friendly

Answer 31

language that seeks to imply that the buyer accepts the content of the Disclosure Letter as constituting fair disclosure should be resisted by the buyer.

Question 32

Buyer’ss knowledge - Eurocopy plc v Teesdale

Answer 32

In the U.K. case of Eurocopy plc v Teesdale and others [1992] BCLC 1067, the agreement contained the usual provision that the warranties were given subject only to the matters set out in the Disclosure Letter but that no other information of which the buyer had actual, constructive, or imputed knowledge would preclude the buyer claiming breach of warranty or reduce any amount recoverable in respect of breach of warranty.

NOT VALID CLAUSE

Question 33

Quantification of Damages for Breach of Warranty/Representation

Answer 33

Depending on the outcome of those negotiations, the consequences for the buyer may be:
• An inability to recover for certain elements of loss that were not reasonably envisaged by the parties when the transaction was entered into; or
• Where the price of the business is based principally on profits, an inability to recover in respect of a shortfall in warranted assets, if those assets do not affect the profit-earning capacity of the business.